Cold cuts

By John. F. Hotchkis

President Obama was clearly on fire the other evening before the joint session of Congress. He should have been tested afterwards for whatever substances Barry Bonds is alleged to have taken. The speech was forcefully delivered. His words were crisp. His pauses were dramatic. He was very good. Almost too good. For us more average types a stumble or two would have been nice. As the old saying goes, he must eat silk for breakfast.

Now of course comes the question raised by Maureen Dowd in a recent column, “How long can the President sustain the sizzle before the fizzle? Does he get it together when the country’s in trouble or when he’s in trouble?”

He put a big load of familiar stuff out there for Congress to chew on and no doubt they will chew away and away. Cleverly he postponed telling us how he would like to pay for the $447 billion package (we know now). Hey, why spoil the evening. Reminds us of Will Roger’s comment when asked how he should handle the German submarine menace during WWI. “Boil the ocean” he said, “I will leave the details to you.”

Trying to put 15 million people in the U.S. back to work won’t be easy by any means. Some 44% of these folks have been out of work for more than a year. We are beginning to look a little like Europe where not working is considered a career. Yes, the President got it right in emphasizing small-business employment. U.S. job growth depends on small businesses to a huge degree and start ups fuel job growth disproportionately. All those tax incentives he proposed may help. But, he failed to say much about the biggest problem facing small enterprises. New regulations and environmental requirements are currently suffocating these people. Large corporations may tolerate much of the expense, but one size fits all is simply too much for small businesses. We have gone a little overboard. We need to pull back a bit. We should give more freedom to entrepreneurs so they can continue to do what this country does best.

President Obama has talked about jobs a great deal since he became President. He has signed big-time stimulus packages. He had Paul Volcker head a new committee, The Economic Recovery Advisory Board of 2009. This effort soon died and was replaced by another new committee, The Council on Jobs and Competitiveness of 2011, chaired by Jeffrey Immelt, the CEO of GE. Interesting selection. To my knowledge, GE may buy companies but doesn’t start them. The company never pays much in taxes and doesn’t seem to be doing much hiring. The stock is down at least 15% this year and is 51% lower than when Jeffrey Immelt took over as CEO ten years ago. In short, if last August’s job numbers are any indication we have made little headway in reducing unemployment.

Robert J. Barro, a professor of economics at Harvard and the Hoover Institute (can you believe that!), reminds us that the main driver of business cycles is investment. In fact, the main decline in GDP during this past recession showed up in the form of reduced investment by businesses and households. Investments are driven by stable expectations of a sound economic environment, including a long-run path of tax rates, regulations, etc. Professor Barro emphasizes that effective incentives for investment and employment require permanence and transparency. He further argues everything the President has proposed is only temporary and even more harmful are all those undefined and ambiguous regulations and rules.

Our spending has also become a serious problem. Over the years Congress has made so many promises to so many Americans that there is simply no conceivable way these promises can be kept, even if Warren Buffett pays more taxes. As Winston Churchill put it, “I contend that for a nation to try and tax itself into prosperity is like a man standing in a bucket and trying to lift himself out by the handle.”

Theoretically, politicians can reduce spending to match revenues. Unfortunately, we have elected people who are simply not willing or not able (or both) to do so. Currently our leaders agree we need a play, but that seems to be as far as they want to go. One Congressman tried to explain the challenge this way…“The real problem with big issues like Medicare is that both parties have to be brave at the same time.” Vanna White used to say about her TV job, “It’s not the most intellectual job in the world, but I do have to know the letters.” Maybe she should run for office!

A childhood memory comes to mind. Those of you who were around back in the pre-technology boom days of the late ‘40s and the ‘50s might recall that to summon someone in the kitchen the hostess would press a movable foot switch located under the dining room carpet. One memorable evening in our house, two of us children in the family thought it would be fun to move the switch well out of reach for our mother who was hosting a dinner. Watching her quietly but nevertheless determinedly stomping around trying to find the little thing, while still carrying on a lively conversation with her dinner partners was absolutely hilarious. It was worth all 20 lashes.

This is what our politicians in the U.S. are doing. While carrying on the talk thing they are stomping around presumably in search of the foot switch, but the difference is that they really don’t want to find it. Everybody already knows what the next course will be…”cold cuts” like in cuts of entitlement spending and increasing the retirement age for Social Security. Yuck. Austerity is not what politicians do. It goes without saying they would like to continue chatting away for a while longer. Much longer if possible. Maybe even up past November 2012. Remember Ronald Reagan’s comment, “I have wondered at times about what the Ten Commandments would have looked like if Moses had run them through the U.S. Congress.”

As usual, to postpone possible decisions another panel has been formed. This one is courageously called the Deficit Reduction Panel and consists of 6 Republicans and 6 Democrats. Its mission is a little vague, but apparently they have until Thanksgiving to come up with a plan to cut the Federal deficit by $1.5 trillion (over 10 years). Congress must actually pass these cuts by December 23rd. If this doesn’t happen, a set of $1.5 trillion in automatic spending cuts would kick in (but of course not immediately), and there won’t be any eggnog at the Christmas party. The last panel (the long forgotten Bowles and Simpson) came up with some very solid ideas to reduce our debt, all of which could be at the bottom of the sea with Bin Laden as far as anyone knows.

Medicare, Medicaid and Social Security are by far the most popular programs in our history. It is no secret at current levels of spending…you know the rest of the story. It isn’t pretty. The House Ways and Means Committee predicted in 1967 that the new Medicare program would cost $12 billion in 1990. The actual cost that year was $110 billion and the cost in 2010 was $523 billion. Obamacare is coming next and as P.J. O’Rourke commented “If you think health care is expensive now, just wait until you see what it costs when it’s free!”

Incidentally, when Social Security arrived on the scene using 65 as the retirement age, life expectancy for a male was 61. Times have certainly changed. From 1840 to 2007 life expectancy in the U.S. has almost doubled because of diet, drugs, genetic therapy, and replacement of worn parts. We soon may have to put up with a whole bunch of cranky and wrinkled old folks and their 100th birthday parties.

So let’s talk about the economic recovery. In the U.S. it is the weakest ever, averaging a tepid 2.5% compared with the 5.5% we have experienced in a typical rebound. Confidence has dropped like a stone, and of course if consumers don’t start buying again soon, the world will come to an end. Apparently nobody has anything very positive to say. If they did, it won’t be printed anyway. As usual, when economists get a little rattled, they take cover in Las Vegas speak. Many are saying there is now a 30% chance of a new recession in the U.S. and a 50% chance in Europe, where incidentally we send 22% of our exports.

Just about anyone you ever heard of is talking slow growth globally. That’s the most optimistic call. Many figure the European Union is about to drop the Union part. Greece will go fiscally bye-bye. Italy isn’t too far behind. French banks have loaned a ton of money to Greece and not even the no-nonsense Germans can force the Greeks into austerity. The euro could collapse. Trichet, the Bernanke of the EU, may have great difficulty raising 80 billion euros his banks will need by year end.

No one thinks much of the U.S. economy either. Our leadership is hot and cold and often bewildered. Most everyone in government seems to be dancing around our problems waiting for 2012. Thanks to the fiscal drama in Europe and the mortgage mess, our banks have really taken a beating. Lawyers are on a feeding frenzy. Everybody is suing everybody. Even the Federal Housing Finance Agency is suing on behalf of Fannie Mae and Freddie Mac, those poor little innocent folks who gobbled up all that toxic waste. All this brings back memories of those enormous tobacco suits, except that nobody should die from a mortgage.

Now the message. You should probably find a seat. It is precisely such muddy times when everyone is heading for the lifeboats of the 10-year U.S. Treasury note (lowest yield in 60 years) and gold (all time high) that you should own the bluest of the blue-chip stocks. These companies enjoy strong balance sheets and have generous dividend yields, considerably more enticing than what Treasurys pay. While the economies of the world are struggling and politicians are stumbling, we are presented an incredible opportunity for long-term equity investors. And just think what the U.S. will be like when it grows up. You don’t want to be any place else.

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